(Bloomberg) — Rules governing U.S. equities trading should be pared back because current regulations have made the market vulnerable to breakdowns, according to a senior executive at the company poised to buy the New York Stock Exchange.
Tom Farley, the senior vice president of financial markets at IntercontinentalExchange Inc., said that regulations introduced since the late 1990s have forced “unnatural competition and evolution” between public stock exchanges and among trading venues run by broker-dealers. Atlanta-based futures market owner ICE is acquiring NYSE Euronext.
To improve the U.S. stock market, “I would probably start by getting rid of rules — and some pretty big rules,” Farley said Tuesday at a Baruch College conference in New York. He declined to identify those he would prefer to eliminate. “There’s been several significant rules that have been layered on in the last 15 years that have resulted in a costly and complex market,” he said.
Farley spoke almost seven weeks after Nasdaq OMX Group Inc., NYSE Euronext’s smaller competitor, was forced to halt trading of the U.S. companies it lists for three hours because of a software malfunction. In the aftermath, U.S. Securities and Exchange Commission Chairman Mary Jo White told exchanges to collaborate on preventing breakdowns. The disruption followed a series of errors that Standard & Poor’s says may threaten industry credit ratings around the world.
Island, Archipelago
The emergence of the Internet and lower-cost computer hardware fueled the creation in the 1990s of trading platforms such as Island ECN Inc. and Archipelago LLC, which were ultimately purchased by the biggest incumbent exchange owners, Nasdaq and NYSE, respectively. Those systems helped lower investors’ costs, a shift that was accelerated in 2001 when the SEC required a shift to trading shares in 1-cent increments, cutting profits for market makers.
Then, in 2007, an SEC rule known as Regulation NMS went into effect, requiring stocks to trade on whatever market has the best price at any given time. That helped ingrain the fragmentation of U.S. trading, which now takes place on more than 50 systems, including 13 public exchanges as well as private venues and internal platforms at brokers.
Futures trading is less segmented because U.S. derivatives markets own their own clearinghouses, meaning investors have to exit positions at the same exchange where they entered them, such as those run by ICE or Chicago-based CME Group Inc. That market structure has created a high barrier to entry in futures trading and limited competition.
“The futures markets aren’t perfect, but I was the president of our U.S. futures market for seven years and I never once had anybody complain” about liquidity, Farley said today. “There are whole conferences dedicated to the issue in equity markets.”
